Sitting here this morning looking at charts trying to get some idea of how to plan out the next month of trading. There seem to be two popular outlooks around Twitter. One view is that we are about to break out to the upside and rip to new highs. The other end of the spectrum is that we are due for a pullback very soon after this nine week run. Which will it be?

If you just look at the chart and the public opinion, the winning view seems to be breakout and run to new all time highs. BUT, the concern I have is that the market usually does the thing that punishes the most people. Almost everyone is long here and getting longer as we approach the top of the range at 280. I can’t find anyone I know who is short or even suggesting to get short at the top of the range. It’s a FOMO driven rally and nobody wants to be out of stocks in fear of missing the big move. The fundamentals and economic numbers don’t support this pace of value increase (not that fundamentals have mattered anyway for the last few years). I get the feeling that everyone is on the same side of the boat right now and leaving themselves open to a severe adverse move. Who else is left to buy?

Another concern is the FED. The narrative right now is that easing is on the way with rates possibly moving lower. I just can’t get behind this view. How in the world can the FED even possibly consider lowering rates if the $SPY makes a run at 300? If anything, they should be using that spike to RAISE rates so that they can have more ammo for the inevitable collapse of the 300+ bubble. Make no mistake, this market will eventually reach a top, and when it does the move down will be fast. Wouldn’t it be more beneficial to the FED to have a little more ammo to ease the fall rather than wasting their ammo here lowering rates as we are ripping to 300?

I posted a $TLT chart last week which showed a big area around 122.50-123 to keep an eye on. If the chart rejects there and starts down (rates up), this would probably be the first clue that a blowoff type top in the $SPY is coming. If a parabolic move happens, the FED will have no choice but to try and control it (raise rates) before it goes full bubble. Greenspan got caught in the same situation. Keep an eye on the narrative change from easing to possibly raising and tightening. If that happens, the $SPY is going to react just as it did in October when Powell suggested that tightening was coming.

As for energy, money is moving into the bigger cap names, which shows mostly in the run in the $XLE. The problem child in energy is the $XOP. It is lagging both the $XLE and $SPY. This suggests to me that energy’s future move is going to be tied directly to the $SPY rather than to the price of oil.

The $XOP hasn’t recovered nearly as much as the $XLE or $SPY. It hit a high of almost 45 back in October when the $SPY was sitting at 293. The $SPY has bounced back to 278, however the $XOP is barely hanging on to 30. The $XOP would have to increase by 50% just to get back to those October highs, while it would only take about a 5-6% move in the SPY to get back to October highs. The E&P’s appear to be somewhat dead money and I just don’t know what would make them suddenly rip 50% to get back to highs. They should be doing better right now, but they aren’t.

The $USO shows the same characteristics as $XOP. It’s sitting 12 right now, after a high of 16 in October. What this suggests to me is that the $SPY run right now isn’t about economic strength. If it was about economic strength, oil would be doing much better. A strong economy needs oil, but oil and the E&P’s aren’t recovering. This suggests that the $SPY run is all about something else other than the economy and that something is FOMO, China Deal, and FED manipulation with more easy money. All that easy money still isn’t stoking inflation, which may be another reason oil isn’t ripping like the overall market.

Given all that, I have a really difficult time putting money in E&P’s for any type of longer term play. I just don’t see the odds pointing to a run up, however I see high odds that they could totally collapse if something goes wrong with the overall market. It just doesn’t lead to a high odds profitable trade. Of course that doesn’t mean they aren’t tradable for short bursts, they most certainly are, just not for longer term swings.

This coming week should tell us a lot about the health of this market. I’m guessing we get a rip to the upside and we could be looking at new all time highs soon. I really don’t want to see this. I don’t think it is long term healthy. I would much rather see the market slowly consolidate back to around 260 and then start a slow grind upward. If this market rips 300 in the next month or two, there’s a real danger that a blow off top develops which could lead to a bear market. Everything has been going perfectly lately, can that continue? The FED has given the market everything it desires, what more do they have to give, especially with a bubble possibly forming? If the market is running on a possible China deal, then what happens after the deal is done, what do we focus on then? And where are those black swans? You know they are out there somewhere and it has been a long time since one appeared. Could the market handle it, or would there be mass exodus if one appeared? Who is left to buy if it did occur? Everyone is sitting on the same side of the boat long right now, at some point that will change, and it will change quickly.

Be careful out there this week, it is going to be a crazy one.

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on Sunday, February 24th, 2019 at 10:35 AM and is filed under Trading Blog.
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